Bank of England set to cut rates in August - UBS

Investing.com - The Bank of England meets next week, and UBS expects the central bank to trim interest rates in what is widely seen as a close call as to when it will start what is likely to be a slow and steady reduction path.

The U.K. central bank’s Monetary Policy Committee convenes on Aug.1, and financial markets see a roughly 45% chance that the BoE will lower rates to 5%.

In June, the BoE's Monetary Policy Committee voted 7-2 to keep interest rates at a 16-year high of 5.25%.  

Bank of England Chief Economist Huw Pill said earlier this month that it was an open question whether the BoE would cut interest rates at the August meeting, as underlying price pressures showed "uncomfortable strength."

Analysts at UBS acknowledged that the decision is a close call, but expect the BoE to deliver the first 25 basis-point cut in early August.

“The key reason why we expect the MPC to cut rates is the recent data,” UBS said, in a note dated July 24.

“First, June headline inflation, at 2%, was exactly in line with the Bank's May projections, despite upside surprises in April and May. Second, the overshoot in services inflation (5.7% in June vs the BoE's estimate of 5.1%) was largely caused by volatile and regulated components, which should not have an impact on the medium-term inflation outlook - an assessment shared by several MPC members, according to the June minutes.”

“Third, the July labor market report showed more pronounced signs of a slowdown in wage growth with, private sector regular pay easing 0.3pp to 5.6% y/y in May, broadly in line with the BoE's May forecast.”

Looking ahead, UBS forecasts another 25bp cut in November, implying cumulative 50bp of cuts this year, which would bring Bank Rate to 4.75% by end-24. For 2025, it expects cumulative cuts of 175bp to 3%. 

“However, with risks to the inflation outlook skewed to the upside and uncertainty about the degree of easing by the other major central banks (i.e. Fed and ECB), we acknowledge that our projection of the speed and extent of cuts in 2025 might be too dovish,” UBS added.

The Bank will publish its quarterly Monetary Policy Report alongside the rate announcement next week and hold a press conference.

“We expect the updated BoE projections to show higher near-term growth projections, while continuing to show inflation dipping below 2% in 2026, thus signalling that rates will possibly need to be cut more than currently priced by the markets,” UBS added.